The purchase of your home is one of the largest financial investments you’ll make. Naturally you’ll want to consider protecting that investment with insurance. But is mortgage insurance or life insurance the better option when safeguarding your family? While both will provide the funds to payoff your mortgage should something happen to you or your partner, there are significant differences between the two options. The truth is that it depends. After we walk you through the differences, you’ll have a much better understanding and be in a better position to determine which is best for you.
Let’s first look at mortgage insurance. Mortgage insurance is convenient and typically purchased from the bank, financial institution that is lending you the money for your mortgage or through your mortgage broker, and easily added onto your monthly mortgage payments. This convenience comes with a cost and some potential risk. In most cases, mortgage insurance is more expensive than term life insurance for the same initial amount of coverage, and while your premiums will remain the same for the length of time your mortgage is insured, the amount that would actually be paid out shrinks as you pay down the principal with each mortgage payment. In addition, every time you renew your mortgage or change lenders you will need to rewrite and qualify again for your policy. With most mortgage terms at no longer than 5 years, this means that there is more renewal health risk with this kind of coverage.
On the other hand, life is very busy when you are in the process of purchasing a new home or renewing your mortgage and we understand. There are many moving pieces that come together to make home ownership a reality. Something is better than nothing so we encourage our families to initially put the mortgage insurance in place with the intention of obtaining a personal term life insurance policy and cancelling the mortgage insurance once that policy is in place and here’s why:
The biggest risk with insurance from the lender is that they have post claim underwriting, which basically means that the medical underwriting will be done after your claim has been submitted. Technically you could be declared uninsurable after your loved ones have submitted a claim and your claim denied. Should this occur, your family will only receive a return of the premiums you had paid. However, if you purchase your life insurance coverage from an insurance agent, all underwriting will be done before the policy is issued so know the insurance company will pay the claim according to the terms of our contract unless you commit suicide in the first 2 calendar years (known as the suicide exclusion period) or you falsified your answers and fraud can be proven. To learn more about post claim underwriting we recommend you view CBC Marketplace “In Denial” episode.
In addition, there are a few other issues inherent with mortgage insurance coverage. First, mortgage insurance contracts always name the lender as beneficiary. You are essentially protecting the bank. Personally owned life insurance purchased through a life insurance agent provides greater control as you select the beneficiary and have the right to change or update your beneficiary designations as you see fit, thereby allowing you to protect your family.
The insured amount or coverage on insurance provided by your lender decreases as you pay down the principal amount of the mortgage with mortgage insurance but the monthly cost remains the same. This is known as “declining balance coverage” in the insurance industry. With a personally owned life insurance policy, your coverage and costs remain the same.
Mortgage insurance is not transferrable to new lenders and often must be rewritten should you renew your mortgage with your existing lender. Personally owned life insurance is fully portable and transferrable should you move your mortgage to a new lender. The death benefit payout on your mortgage insurance policy can only be used to pay off the mortgage. Your family will not have the ability to control how the funds are used at all. A personally owned life insurance policy provides flexibility and options for your family.
Today in Canada, families move on average every 7 years. Mortgage insurance is not portable to your next home. If you sell your home and buy another for any reason, you will have to put a new mortgage insurance policy in place. But what if you are no longer insurable? How would that affect your family? This is known as the increased health risk associated with your mortgage insurance coverage. Alternatively, all personally held individual life insurance policies are portable. With an individual life insurance policy you can simplify your mortgage renewal process or subsequent home purchases and your beneficiaries are able to decide how the proceeds from a claim are used. Personally held individual life insurance policies protect your family and not the bank. They offer more control and options should the coverage be required for your family.
Mortgage insurance policies cannot be modified if your situation changes. Personally owned individual life insurance policies can be modified as needed thereby providing greater flexibility. In addition, most personally owned term life insurance policies are convertible into permanent plans, offering additional flexibility for potential future financial planning opportunities.
Personally owned term life insurance protects you and your family for the duration of the policy and offers clarity because you’ll know at the outset how much you’ll be paying for the coverage for the duration of your mortgage.
If you are interested in learning more or discussing your options with a professional, please contact us for a no obligation consultation.